Fleet Management

Economic Watch: Manufacturing Continues Rebound, Construction Falls

New economic reports show the nation’s manufacturing sector continues improving along with consumer spending-- the latest signs the overall economy is gaining traction-- while a separate report shows construction activity has eased, but only just a bit.

The survey of the nation’s purchasing executives in the manufacturing sector by the Institute for Supply Management shows its October Purchasing Managers’ Index increased 0.4 of a percentage point from September. It registered 51.9% for a second straight monthly increase, matching a consensus estimate from Wall Street analysts.

On the downside, the New Orders Index registered 52.1%, a decrease of 3 percentage points from the September reading but the Production Index registered 54.6 percent, 1.8 percentage points higher than the September figure. Also, the Employment Index registered 52.9%, an increase of 3.2 percentage points from the September level of 49.7%.

According to Bradley J. Holcomb, chair of ISM Manufacturing Business Survey Committee, comments from the panel were largely positive citing a favorable economy and steady sales, with some exceptions

"The past relationship between the PMI and the overall economy indicates that the average PMI for January through October of 51% corresponds to a 2.5% increase in real gross domestic product on an annualized basis,” he said. “In addition, if the PMI for October is annualized, it corresponds to a 2.8% increase in real GDP annually."

A separate report on manufacturing also painted a positive but stronger picture with it strengthening to the greatest degree for a year during October, underpinned by faster expansions in both production and new orders.

The IHS Markit Final U.S. Manufacturing Purchasing Managers’ Index for October was slightly better than the preliminary reading of 53.2, coming in at 53.4. That's a marked improvement from September’s level of 51.5 and the best reading recorded for a year.

Like the ISM measure, a reading above 50 indicates expansion in manufacturing while below that level signals contraction.

According to the report, operating conditions have continuously improved throughout the past seven years, with October’s PMI reading notable for being the highest recorded by the survey for 12 months.

Driving the PMI higher in the latest survey period was a strengthening in production, which was in turn supported by a marked upturn in new orders. In both cases, rates of growth indicated by respective sub-indices were at their strongest in a year, reportedly the result of firmer market demand and the development of new products. Both of these factors encouraged inventory building during the month, with both finished goods stock and input inventories rising since September.

The survey also picked up signs of manufacturers and their customers rebuilding their inventories, often filling warehouses in anticipation of stronger demand in coming months, according to Chris Williamson, chief business economist at IHS Markit.

“However, a widespread reticence to take on extra staff highlights lingering caution with respect to investing in capacity, at least until after the presidential election,” he said. “Hiring is also being subdued partly by worries about escalating costs, with the October survey recording the largely monthly rise in factory prices for five years."

Williamson said while output growth is accelerating, so too are inflationary pressures. That will further fuel speculation that the Federal Reserve will hike interest rates again in December. The central bank increased rates in December 2015 for the first time in a decade.

Construction Still Ahead of This Time Last Year

Meantime, a separate report by the Commerce Department, also issued Tuesday, shows total U.S. construction spending fell 0.4% in September from the month before and 0.2% from the same time a year ago. The August-to-September drop surprised a consensus forecast from analysts expecting a 0.5% gain.

Despite these declines in the first nine months of the year, construction spending amounted to $863.2 billion, 4.4% higher than during the same time in 2015. Also, the August level from the month before was revised upward showing a 0.5% improvement instead of falling 0.3%.

Private construction fell 0.2% last month while residential construction improved 0.5% and nonresidential building fell 1%, its largest drop in nine months. Public construction also fell by a greater amount, 0.9%, despite a 0.9% upturn in highway construction.

“Declines in private sector construction spending were uneven and concentrated in manufacturing, food and retail establishments,” said Diane Swonk, analyst at DS Economics. “Health care also dropped with the exception of hospitals, which have been expanding. Lodging slowed after being on a tear earlier in the year.”

Consumers Keep on Spending

This follows a report that shows U.S. personal consumer expenditures rose 0.5% in September, bouncing back after a 0.1% decline in August, another sign that consumers are willing to open their pocketbooks.

The Commerce Department report also showed that, accounting for price changes, real spending rose 0.3% in September while personal income increased 0.3%, up from 0.2% in August.

The gain in spending matched market expectations and, as expected, was led by a 1.3% jump in spending on durable goods (items designed to last at least three years) flagged by an earlier-reported rise in auto sales in the month, according to Royal Bank of Canada Economics. Spending on non-durable goods rose 0.6% but that entirely reflectied higher prices, as gasoline prices rose sharply in September. Services spending rose 0.3% for a second consecutive month in September despite a weather-related 4% drop in spending on household utilities.

The release of the September spending data provides the monthly detail behind the 2.1% gain in consumer spending in last Friday’s advance third quarter GDP report that, while somewhat smaller-than-expected, still represented a solid pace of growth, hitting a 2.9% annual rate, said Nathan Janzen, RBC senior economist

“We expect overall GDP growth will slow somewhat in the fourth quarter [for a 2.3% annual gain] with both the net trade and inventory additions in the third quarter not expected to be repeated,” he said. “We expect household spending, however, will remain solid going forward, supported by strong labor markets.”

A first look at the nation’s manufacturing for this month shows business conditions improved just a little from the previous month, remaining strong, while a separate report showed that although new homes sales fell last month, they posted a double-digit gain compared to a year ago.

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